Band-Aids not enough for litigation funding

by Jennifer Ball

Litigation funding should be taken out of the "too hard" basket and targeted reforms made to address long-held concerns about litigation funding's legal status and need for a clear regulatory framework.

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It is seven years since the High Court gave litigation funding its blessing. It is also seven years since the State and Commonwealth attorneys-general announced they would take action to address the vexed issue of whether and how to regulate the litigation funding industry.

In July this year, ASIC yet again reasserted its regulatory oversight for at least another 12 months, citing the need for a temporary fix while the federal government decides what it's going to do.

And what about individuals given the opportunity to participate in any litigation funding process? The argument is that unless there are parties who are prepared to fund litigation, it isn't going to happen. Therefore, it is important parties who do fund the litigation are remunerated not only for their costs for funding the litigation but also for the risk.

In a class action involving former Storm financial clients funded by individual investors, a settlement was rejected by the full Federal Court on the basis that it favoured those investors who funded the claim and was unfair to those who did not. The ruling highlights a concern around litigation funding – who decides how much the spoils are shared?

Another lingering concern is the lack to date of a legislative response in relation to litigation funding arrangements.

Earlier court rulings that it was not also a financial product have been overruled by special government regulations.

Those regulations exempt litigation funders from the requirement to hold a financial services licence, provided they have made adequate arrangements to manage potential conflicts of interest – the real tension with litigation funding.

There is yet to be any finality on changes being implemented to the legislation concerning the legal status of a litigation funding arrangement.

As far as anyone can tell, the current situation is that it is definitely an unregistered managed investment scheme and a credit facility, but ASIC has provided a temporary exemption from the unit trust rules of the Corporations Act and the Credit Code.

Although litigation funders and corporate lawyers have traditionally not always been on the best of terms, this is an issue on which there is a lot of common ground.

IMF (which holds an AFSL licence) is Australia's largest litigation funder and an advocate for appropriate regulation of the industry. Although IMF executive director John Walker has previously commented that "calls from the big end of town and their agents for regulation of litigation funding need to be kept in perspective", he has also nominated four priority areas for reform: capital adequacy, strict separation of funders from clients' lawyers, transparency in court and full disclosure to clients. IMF's vested interests aside, it is unlikely that any commercial defence lawyer would disagree with Walker's proposed reform agenda.

It's time to move on from the cold war situation that has long prevailed between litigation funders and commercial lawyers. The tension that exists is that between access to justice and the conflict that inevitably arises with litigation funders.

Our joint focus should now be on persuading the next Federal Government to take litigation funding out of the "too hard" basket and pursue targeted reforms to address long-held concerns about litigation funding's legal status and need for a clear regulatory framework.

Once that step is taken, we can start to look at the real issues, rather than the artificial side-effects of shoehorning litigation funding.

This article was first published in the Australian Financial Review, 25 October 2013

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.